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The first 200 words of this essay...
The breakeven point for a firm is when total costs equals total revenue. Expenditure and income are the same and the firm makes neither a profit or a loss. If the firm can sell at production levels above this point, it will be making a profit. If sales fall below this point, it will be making a loss. Establishing the breakeven point helps a firm to plan the levels of production it needs to be profitable.
Before you can calculate the breakeven point, you need to separate the firm's costs. These include:
These are constant and do not change however many goods are produced. They include rent and insurance.
The firm's variable costs include raw materials and wages. You need to calculate the variable costs per unit. These costs increase in direct proportion to the number of units produced.
You need to establish how many units are to be produced.
You need to know the selling price of the units.
Once you have the above information, you can begin to calculate the breakeven point. You do this either by
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